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Questions and Answers
What distinguishes preferred stock from common stock in the context of liquidation?
What distinguishes preferred stock from common stock in the context of liquidation?
- Both types of stockholders are treated equally.
- Preferred stockholders receive dividends before common stockholders.
- Common stockholders are paid first.
- Preferred stockholders have priority over common stockholders. (correct)
What type of financial asset typically offers fixed returns due to fixed interest rates?
What type of financial asset typically offers fixed returns due to fixed interest rates?
- Common Stocks
- Equity Instruments
- Debt Securities (correct)
- Treasury Bonds
Who qualifies as holders of financial assets?
Who qualifies as holders of financial assets?
- Providers of labor
- Manufacturers of goods
- Consumers of services
- Suppliers of funds (correct)
In the case of an equity instrument, from where do returns primarily originate?
In the case of an equity instrument, from where do returns primarily originate?
What is a key characteristic of debt securities compared to equity instruments?
What is a key characteristic of debt securities compared to equity instruments?
What is the primary benefit of preferred stockholders over common stockholders?
What is the primary benefit of preferred stockholders over common stockholders?
How do capital markets differ from money markets?
How do capital markets differ from money markets?
What happens to the investments of bondholders if the issuing company goes bankrupt?
What happens to the investments of bondholders if the issuing company goes bankrupt?
What is a key characteristic of preferred stockholders in terms of dividend distribution?
What is a key characteristic of preferred stockholders in terms of dividend distribution?
In what situation do common stockholders receive dividends?
In what situation do common stockholders receive dividends?
What advantage do common stockholders have compared to preferred stockholders?
What advantage do common stockholders have compared to preferred stockholders?
Which market is characterized by short-term securities with maturities of one year or less?
Which market is characterized by short-term securities with maturities of one year or less?
What is the primary difference between money markets and capital markets?
What is the primary difference between money markets and capital markets?
Which of the following statements is true regarding debt securities issued by the government?
Which of the following statements is true regarding debt securities issued by the government?
Why might holders of securities choose to sell them in secondary markets?
Why might holders of securities choose to sell them in secondary markets?
Which group of investors is regarded as the real owners of a company?
Which group of investors is regarded as the real owners of a company?
Which type of stock typically has priority over dividends compared to other stock types?
Which type of stock typically has priority over dividends compared to other stock types?
In the context of dividend distribution, who is prioritized first when a company declares cash dividends?
In the context of dividend distribution, who is prioritized first when a company declares cash dividends?
What type of asset is classified as a right to receive cash or another financial asset from another entity?
What type of asset is classified as a right to receive cash or another financial asset from another entity?
What distinguishes money markets from capital markets?
What distinguishes money markets from capital markets?
Which characteristic is true of debt securities?
Which characteristic is true of debt securities?
Which statement about preferred stock is false?
Which statement about preferred stock is false?
What instrument is NOT a financial asset?
What instrument is NOT a financial asset?
What is typically a primary reason investors choose to buy stocks?
What is typically a primary reason investors choose to buy stocks?
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Study Notes
Corporate Bonds
- Issued by publicly listed companies to raise funds through debt.
- Generally offer higher interest rates compared to Treasury bonds.
- Not risk-free; potential default can lead to loss of principal and interest for bondholders.
Equity Instruments
- Contracts that represent residual interest in an entity’s assets after liabilities.
- Common examples: ordinary share capital, preference share capital.
- Returns vary based on issuing company performance, derived from dividends or stock price appreciation.
- In liquidation, common stockholders receive assets only after all liabilities and preferred stockholder claims have been satisfied.
Types of Securities
- Debt Securities: Fixed returns due to predetermined interest rates.
- Examples include Treasury Bonds and Treasury Bills, which have low interest rates and low default risk, backed by government assurance.
- Preferred Stock: Priority over common stock in claims to assets and cash dividends; typically offers fixed-rate dividends.
- Common Stock: Represents ownership in a company, with returns contingent on company performance and dividend declarations.
Financial Instruments and Markets
- Financial instruments create obligations and rights; they can be classified as assets or liabilities.
- Money Markets: Deal with short-term securities (maturities of one year or less).
- Capital Markets: Facilitate trading of long-term securities, involving the supply and demand of funds between individuals and entities.
Cash Dividends
- Paid by companies to shareholders based on their shareholdings; dependent on sufficient retained earnings.
- Non-declaration of dividends can lead to investor disappointment, emphasizing the importance of financial stability.
Financial Assets and Liabilities
- Financial Assets: Include cash, equity instruments, and rights to receive cash or other financial assets.
- Financial Liabilities: Represent contractual obligations to deliver cash or other financial assets.
Private Placement
- Involves selling new securities to a select group of investors instead of through public offerings, allowing for quicker capital raising with fewer regulatory requirements.
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